buyer and seller relationship in the malaysia dairy industy

8/12/2019 Buyer and Seller Relationship in the Malaysia Dairy Industy

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Buyer and Seller Relationships in Malaysias Dairy Industry

by

Bonaventure Boniface

This thesis is submitted in fulfilment of

the requirements for the degree of

Doctor of Philosophy

School of Agriculture, Food and Wine

Faculty of Sciences

The University of Adelaide


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Dedication

This thesis is dedicated to my family: To my wife, Doreen who has been continually

supportive and who has encouraged me throughout my years of study and to my children:

Dawson, Daniel and Bridget, who have given me the inspiration to write and to finish this

thesis.


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Declaration:

I, Bonaventure Boniface, hereby declare that this thesis contains no material which has

been accepted for the award of any other degree in any university or other tertiary

institution. This work contains no material previously published or written by another

person, except where due reference has been made in the text and is completely written by

me.

I give consent to this copy of my thesis when deposited in the University Library, being

made available for loan and photocopying, subject to the provisions of the Copyright Act

1968.

I also acknowledge that copyright of published works within this thesis (as listed below)

resides with the copyright holders of those works and give permission for the digital

version of my thesis to be made available on the web, via the Universitys digital research

repository, the Library catalogue and also through web search engines, unless permission

has been granted by the University to restrict access for a period of time.

List of publications:a) Bonaventure Boniface, Amos Gyau, Randy Stringer and Wendy Umberger. (2010).

Building producer loyalty in Malaysias fresh milk supply chain, Australasian

Agribusiness Review, Vol 18, 5, pp. 66-84.

b) Bonaventure Boniface, Amos Gyau and Randy Stinger. (2012). Linking pricesatisfaction and business performance in Malaysias dairy industry, Asia Pacific

Journal of Marketing and Logistic, Vol.24, No.2, pp. 288-304.

Waite Campus, 21stJune 2011

Bonaventure Boniface


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Abstract:

This thesis examines buyer and seller relationships between dairy producers and milk

buyers in Malaysia. The study investigates the determinants of long-term relationships.

While relationship marketing has received considerable attention in many other industry

sectors, few studies have addressed the food industry. The existing agri-food studies

emphasize long-term relationships, investigating variables such as trust, relationship

quality and guanxi networks.

This thesis addresses how buyers and sellers interact and what influences them to engage

in longer-term relationships to improve their business performance. The specific research

objectives are to investigate: (i) the determinants of relationship quality and its influence

towards long-term relationships; (ii) the determinants of trust and its influence towards

supplier loyalty; (iii) the influence of price satisfaction dimensions towards loyalty and

business performance; (iv) segmentation of producer perceptions of the relationships; and

(v) consumers preferences and consumption of dairy products.

The study develops and tests a long-term relationship measure of loyalty and relationship

commitment. The thesis identifies commitment and loyalty as the essential measures of

long-term relationships. Data was collected from 133 dairy producers through face-to-faceinterviews in Malaysia in June and July 2009. The random sample of producers came from

the Department of Veterinary Services database. The data are representative of dairy farm

operations throughout Malaysia, providing representative examples of the marketing

channels, contracting methods and memorandum of understanding used between producers

and buyers. The various scales of operation in Malaysia are also represented.


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Table of contents

Dedication

Acknowledgement

Declaration

Abstract

Table of contents

List of Tables

List of Appendices

List of Acronyms

1.0 Overview of the study1.1 Introduction1.2 Background of the research1.3 Research Objectives1.4 The Conceptual Framework1.5 The significance of the study1.6 Structure of the Thesis

2.0 Relationship marketing and agri-food supply chain2.1 Introduction2.2 Theoretical approach in buyer-seller relationship2.3 Relationship marketing development2.4 Emphasis on buyer and seller relationships in agriculture2.5 Methodological approaches and data analysis2.6 Conclusion

3.0 The role of long-term relationship in Malaysias dairy supply chain

4.0 Building producer loyalty in Malaysias fresh milk supply chain(published at Australasian Agribusiness Review).

5.0 Linking price satisfaction and business performance in theMalaysias fresh milk supply chain (published at Asia Pacific Journal

of Marketing and Logistic)

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6.0 Producer relationship segmentation in Malaysias milk supply chains(accepted at British Food Journal).

7.0 Factors influencing Malaysian consumers consumption of dairyproducts.

8.0 Discussion and summary8.1 The buyer and seller relationship in Malaysias dairy industry8.2 Managerial and policy implications8.3 Knowledge contribution to the body of literature8.4 Directions for future research

References

Appendices

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List of Tables Pages

Table 2.1: Marketing strategies of transaction and relationship marketing

Table 2.2: Development of buyer/seller relationships

Table 3.1: Number of producers according to firm size and level of education

Table 3.2: Aspects of relational behaviour

Table 3.3: Aspects of relationship quality, loyalty and relationship commitment

Table 3.4: Results of the structural model

Table 4.1: Output, consumption and self-sufficiency of Malaysian fresh milk


Table 4.3: Results of hypothesis testing using AMOS 17.0


Table 5.2: Operationalisation of the variables

Table 5.3: Variables and statistical results

Table 5.4: Results of the structural model

Table 6.1: Respondents age, education, experience and firm size

Table 6.2: Producers relationships perception of their buyers

Table 6.3: Producers price satisfaction scores

Table 6.4: Demographic variables and producers segmentation

Table 6.5: Characterization of producer segments

Table 7.1: Summary statistics for demographic variables

Table 7.2: Principal Component Analysis Results

Table 7.3: Consumers purchasing frequency of various dairy products

Table 7.4: Factors influencing retail where dairy products are purchased

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Table 7.5: Factors influencing consumers dairy product purchasing behaviour

Table 7.6: Consumers perceptions of fluid milk

Table 7.7: Estimated coefficients and marginal effects for equation estimating the

probability consumers increased their consumption of dairy products

Table 7.8:Estimated coefficients and marginal effects for equation estimating the

probability consumers increased their consumption of fluid milk

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List of Figures Pages

Figure 1.1: Conceptual model for buyer-seller relationships in Malaysias dairy

industry

Figure 2.1: Supply Chain relationship

Figure 2.2: Factors influencing relationship marketing success

Figure 2.3: The Agri-food chain relationship

Figure 3.1: Malaysian fresh milk supply chains

Figure 3.2: Conceptual model for relational behaviours, relationship quality and

long-term relationships

Figure 4.1: Malaysian fresh milk supply chains

Figure 4.2:Conceptual framework of supplier loyalty in the Malaysian dairy supply

chain

Figure 5.1:Model of price satisfaction, supplier loyalty and relationship performance

Figure 7.1: Share of Malaysia consumers who increased consumption of dairy

products over last three years

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List of Appendices Pages

Appendix 3.1 : Total Model Overview

Appendix 3.2a : Relational Variables and Price Satisfaction

Appendix 3.2b : Relationship quality, loyalty and commitment

Appendix 3.3 : Cross Loadings

Appendix 3.4 : Latent variables correlations

Appendix 4.1 : Questionnaires descriptive analyses

Appendix 4.2 : Principal Component Analysis Results

Appendix 5.1 : Cross loadings

Appendix 5.2 : Latent variables correlations

Appendix 5.3 : Total model overview

Appendix 6.1 : Principal component analysis: trust, satisfaction,

relationship commitment and loyalty

Appendix 6.2 : Principal component analysis: price satisfaction

dimension

Appendix 8.1 : Dairy producers survey

Appendix 8.2 : Dairy consumer survey

Appendix 8.3 : Respondents answering behavior

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List of Acronyms

AVE

B2B

B2C

CF

CFI

DPS

DVS

ECR

FDI

FFV

JIT

KMO-MSA

LTR

MBRT

MCC

MDG

MYR

PCA

PGFI

PLS

QR

RM

Average Variance Extracted

Business-to-Business

Business-to-Customer

Contract Farming

Comparative Fit Index

Dairy Project Scheme

Department of Veterinary Services

Efficient Consumer Response

Foreign Direct Investment

Fresh Fruit Vegetables

Just In Time

Kaiser-Meyer-Olkin Measure of Sampling

Long-Term Relationships

Methylene Blue dye Reduction test

Milk Collecting Centre

Market Driven Group

Malaysian Ringgit

Principal Component Analysis

Parsimony Goodness Of Fit Index

Partial Least Squares

Quick Response

Relationship Marketing


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RMSEA

RG

RQ

SEM

SCM

STATA

TLI

TPC

UHT

USD

Root Mean Square Error of Approximation Index

Relationship Group

Relationship Quality

Structural Equation Modelling

Supply Chain Management

Data Analysis and Statistical Software

Tucker-Lewis Index

Total Plate Count

Ultra High Temperature

United States Dollar


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CHAPTER 1: Overview of the Study

This chapter provides a brief introduction to Malaysias dairy industry and its evolving

challenges due to increasing fluid milk consumption in the country. The research problem

and objectives will be outlined showing a focus on the buyer and seller relationships while

the significance of the study, conceptual framework and an outline of the thesis structure

will be presented at the end of the chapter.

1.1 Introduction

Malaysias agri-food industries continue to undergo rapid and fundamental structural

changes in response to changes in the economic situation of consumers. Technology

including the internet, modern transportation, media and sophisticated communication

devices create new consumers who demand high quality, healthy and differentiated food

produce at reasonable prices (Arshad, Mohamed & Latiff, 2006). Increased concentration

on processing, trading, marketing, and retailing is being observed in all regions of the

country and in all segments of the production-distribution chains. The traditional ways of

producing food are being replaced by practices more related to consumers needs, thereby

necessitating a need for greater coordination between respondents, processors, wholesalers,

retailers, and others in the supply chain.

Generally, Malaysian consumers are known to be cautious and aware of food quality,

safety, and income trends, which leads to more affluent consumers demanding

convenience foods that are healthy and nutritious. In fact, there has been a significant

increase in per person consumption of cereals and milk from 160.3 kilograms and 32.9

kilograms, respectively, in 1990 to 171.6 kilograms and 43.5 kilograms in 2005 (FAO,

2007). In contrast, rice consumption declined by around 15% over the same period (Warr,Rodriguez & Penm, 2008). The shift in food consumption towards dairy products indicates

growing health awareness among Malaysians and the trends are expected to continue

throughout the next decade (Dong, 2006). Inevitably, altering food consumption and

increasing imports have significantly changed the structure of Malaysias dairy industry.

Malaysias dairy market is projected to expand rapidly, and by 2014 dairy product

consumption is expected to increase by more than 30% (Dong, 2006). Fluid milk

consumption per capita was estimated at around 47.5 kilograms in 2010, which contributed


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received considerable attention in many industries such as the services, banking and

manufacturing industries, it has not been thoroughly explored in agricultural and food

supply chains (Fischer & Hartmann, 2010).

Relationship marketing research in the food industry is relatively recent (Batt, 2003; Gyau

& Spiller, 2007; Lu, Feng, Trienekens & Omta, 2008) with most of the studies

emphasizing long-term relationships and investigating variables such as trust (Batt, 2003),

relationship quality (Gyau & Spiller, 2010) and guanxi networks (Lu et al., 2008). The

outcome of these studies may differ from those of this study, for as Palmer (1997) argues,

relationship marketing means different things in different cultures.

1.2 Background of the research

The establishment of Malaysias dairy industry was initiated by the government and

motivated by the objectives of helping small scale producers cope with increasing milk

demand and improving rural development. In the early years of establishment, Malaysias

dairy industry faced many constraints especially in farm production and husbandry. These

constraints related to milk quality problems (Chye, Abdullah, & Ayob, 2004), high input

costs (Wells, 1981), unsuitable dairy cows for tropical weather with low milk yields

(Boniface, Silip & Ahmad, 2007; Murugaiyah, Ramakrishnan, Sheikh Omar, Knight, &Wilde, 2001) and inefficient farm management (Pharo, et al., 1990). Therefore, for many

years, Malaysias dairy industry has been emphasizing research on farm production and

husbandry. For example, Wells (1981) investigated the impact of milk subsidies on dairy

development and found that the industry was heavily subsidised. Wan Hassan, Phipps, &

Owen (1989) suggested integrated farming to reduce production costs.

Other studies emphasized technology transfer such as computerised recording systems

(Pharo, et al., 1990), while others focused on milk quality (Chye, Abdullah, & Ayob, 2004)

and milk production (Murugaiyah, Ramakrishnan, Sheikh Omar, Knight, & Wilde, 2001).

As a result of extensive research on husbandry management and breeding technology, local

producers are now able to produce better quality milk and a considerably larger yield.

However, with higher milk demand, the local dairy industry is only keeping pace with its

overall market share, around 5% (Boniface et al., 2010).


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Milk marketing in Malaysia is dominated by a state-owned enterprise, the Milk Collecting

Centre (MCC), under the supervision of the Department of Veterinary Services. The

government provides centralised milk collection and distribution facilities, some rural

credit, milk subsidies, as well as around 10 dairy cows for start up and extension-service

support for animal nutrition and hygiene. Producers sell their milk to the MCC at a

predetermined price, which is based on a grading system, however, this contract does not

restrict the producers from selling their milk to other buyers so consequently, there are

multiple markets for the producers.

Some producers sell their milk to private traders and others sell directly to restaurants or

processing firms, including Dutch Lady Milk Industries Berhad, Susu Lembu Asli and

Sabah International Dairies (Boniface et al., 2010). There are wide differences in the pricesreceived by farmers depending on to whom they sell. For instance, whereas the farm gate

price that the farmers receive from the MCC and factories ranges from MYR 1.80 to MYR

2.50 per litre based on milk quality, the price range for individuals, agents and restaurants

lies between MYR 2.20 to MYR 4.00 based on market demand. The multiple markets and

price differences create constant competition among milk buyers. A competitive market

encourages effective supply chain management by promoting closer and long-term

working relationships between partners (Spekman et al., 1998).

The strength of supply chain management lies in the value-adding potential at each level

such as promoting long-term relationships between exchange partners, which may

encourage sustainable business exchanges (Spekman et al., 1998; Fischer and Hartman,

2010). Malaysias dairy supply chain consists of consumers, milk buyers (including the

MCC) and producers. The main motivation for the local milk supply to evolve is the

consumer, and in order to keep abreast of the increasing consumer demand, both milk

buyers and producers need to work together. Long-term relationships between both parties

are essential (Batt, 2003; Lu et al., 2008); milk buyers are competing against each other to

secure constant milk supplies as a result of the limited number of dairy producers and the

escalating demand for fresh milk. Therefore, having loyal producers is crucial.

The dairy producers, however, are predominantly small-scale operations with just a few

that are large scale. The varieties in farm size relate to different kinds of producers skills

and attributes. Most of the producers have been in the business for more than 10 years, and


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have substantial expertise and solid husbandry skills, including modern breeding

technology for improving milk quality. Other producers are well established in developing

their own feed supplies to increase milk yields. Considering the expertise, knowledge and

investment in these businesses, the establishing and maintaining of trusted buyers becomes

crucial for producers.

However, there is limited understanding of how milk buyers and milk producers interact in

the markets in Malaysia and of what motivates producers to stay in a relationship. What

factors may encourage long-term relationships? In the presence of market prices, could

price satisfaction play a significant role in enhancing buyer and seller relationships? Could

the varieties in farm size and skills influence buyer-seller relationships? These questions

bring us to the research objectives.

1.3 Research Objectives

This thesis focuses on the role of relationship marketing (RM) between buyers and sellers

in Malaysias dairy industry. The author is interested in how the two exchange partners

interact and what influences them towards establishing long-term relationships in order to

improve their business performance.

The specific research objectives were to investigate:

a) the determinants of relationship quality and its influence on long-termrelationships;

b) the determinants of trust and its influence on supplier loyalty;c) the influence of price satisfaction dimensions on loyalty and business

performance;

d) segmentation of producer perceptions of the relationships; ande) consumers preferences and consumption of dairy products.

The understanding of consumers preferences and consumption is crucial as a motivating

force for the continuation and development of the Malaysian dairy industry. It is intended,

that, apart from strengthening the bond between exchange partners in coping with an

emerging economy, milk buyers and producers might have some insight into the dairy

consumers consumption patterns and preferences. This will then have a motivating effect


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on industry growth or decline. The outcomes of the study may also facilitate government

policy formulation and future direction planning.

1.4 The Conceptual Framework

To aid in better understanding of the discussion in each chapter, a general conceptual

framework is presented which derives from the inter-firm literature and focuses on the

buyer-seller relationship (see Figure 1.1).

Relationship marketing (RM) has been consistently viewed as an effective strategy in

promoting interaction between the buyer and the seller (Hunt & Lambe, 2000). The main

goal of RM is to create and maintain lasting relationships between exchange partners that

provide mutual benefits to both sides (Rapp & Collins, 1991). Promoting long-termrelationships provides many benefits between exchange partners, for example, in the

market place it reduces transaction costs, encourages collaboration and avoids switching

behaviour of the suppliers (Hobbs 2001; Hunt & Lambe, 2000; Venetis & Ghauri, 2004).

For this study, a long-term relationship measure of loyalty and relationship commitment is

developed. Since both relationship commitment and loyalty are not built overnight, it can

be considered as a suitable gauge reflecting the ongoing process of the relationship(Anderson & Narus, 1990; Ford, 1980; Morgan & Hunt, 1994). The development of the

measure also relies on the quality of the relationship between partners which derives from

relational variables such as goal attainment, constant communication, joint action,

flexibility, power distance, and mutuality (Gyau & Spiller, 2010; Ivens, 2004; Mohr,

Fisher, & Nevin, 1996).

Relationship quality can be defined as the producers perception of how well their

relationships fulfil the expectations, predictions, goals and desires of the customer

(Schulze, Wocken & Spiller, 2006; Gyau & Spiller, 2010), and can be considered as an

appropriate indicator of a successful relationship (Hennig-Thurau & Hansen, 2000).

Relationship quality is manifested in several distinct but related constructs and, as a result,

there seems to be no consensus among researchers on the set of constructs or variables

which constitute relationship quality, or what its antecedents are (Crosby, 1990). Because

of this, different researchers have used different variables to measure the relationship

quality construct (Crosby et al.1990; Gyau & Spiller, 2010).


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Many research studies indicate that relationship quality may enhance business-to-business

relationships. For instance, Crosby et al., (1990) explain that relationship quality in the

service industry is essential in fostering sales effectiveness and sustainability. Rauyruen

and Miller (2007) added to this and showed that the presence of relationship quality in the

courier delivery service industry eventually influenced partner loyalty. Based on this

premise, having relationship quality with exchange partners can influence and promote

long-term relationships as well as business performance.

OToole and Donaldson (2000) further argue that performance can be seen as both

financial and non-financial. They conceptualized financial performance as closely related

to economic rewards such as return on investment, cost sharing and long-term profitability,while non-financial performance is the outcome of mutual interest, trust and satisfaction in

relationships. This research considers business performance as an integration of both the

financial and non-financial.

Figure 1.1: Conceptual model for buyer-seller relationships in Malaysias dairyindustry

In many ways, interaction between firms starts with economic motivation such as price in

that buyers who offer a reasonable price will attract sellers. However, price asymmetry in

the market may increase switching behaviour as sellers continually look for better and

more reliable prices. This is an important element, consequently, the nature of price

satisfaction and its dimensions in gaining supplier loyalty is investigated in this research.

Price satisfaction refers to the psychological result of a difference between priceexpectations and price perceptions (Matzler et al., 2007). In any market exchange

Long-Term Relationship

Relationship quality

Relational Variables

Price Satisfaction Dimensions

Business Performance


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relationship, price is a dominant factor. Maztler et al., (2007, p.217) state that the central

role of price as a purchasing determinant as well as in post-purchasing processes is well

recognized. However, understanding price satisfaction as a multi-dimensional construct

provides a better understanding of the customers satisfaction with price (Matzler et al.,

2007). Geyskens et al., (1999) find that satisfaction can be achieved through economic and

non-economic factors, because offering a better and more reasonable price fulfils the

economic reward, while feelings of being appreciated and perceived fairness complete the

non-economic satisfaction (Geyskenset al., 1999).

1.5 The Significance of the Study

This research will propose three structural equation models, followed by a cluster analysis

to provide a comprehensive description of the buyer-seller relationship in the Malaysiandairy industry. Each chapter will address the research objectives to measure and evaluate

relational perceptions of the dairy producers toward their buyers. Model one investigates

the determinants of relationship quality and its influence on long-term relationships. Model

two scrutinizes the suppliers trust in the milk buyers and how it influences suppliers

loyalty; and model three focuses on the multi-dimensions of price satisfaction in the

industry. The cluster analysis provides a comprehensive analysis of the producers

relationship segmentation based on their loyalty, trust and price satisfaction. The logitregression model is a confirmation of Malaysian consumers preferences and factors in

purchasing dairy products.

The outcome from this research will offer milk buyers comprehensive guidelines for

determining the best approach in building achievable and workable relationships with dairy

producers. Chapter 7 further clarifies the future of the industry and the best practice

marketing strategies based on consumers preferences and factors influencing them to buy

dairy products such as fluid milk, powdered milk and ice-cream. Furthermore, the study

will contribute to the current knowledge of buyer-seller relationships through an

examination of the multi-dimensions of price satisfaction and its influence on suppliers

loyalty. It further shows the importance of having a prominent and quality relationship in

the emerging economy.


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To gain a better understanding of the whole research, a conceptual model was developed as

presented in Figure 1.1. The model is a summary of different models presented and

discussed separately in each of the chapters. In the next section, the structure of the thesis

is presented.

1.5 Structure of the Thesis

Chapter 1Overview of the Study

Topics covered in this chapter comprise the background of the research, the research

objectives and the general conceptual model.

Chapter 2Literature Review

Chapter 2 discusses the evolution of relationship marketing in buyer and seller interaction.

The importance of relationships/networking between exchange partners in the agricultural

industry is also presented.

Chapter 3Developing Long-Term Relationships in Malaysias Dairy Industry

Chapter 3 discusses the importance of building long-term relationships in the Malaysian

dairy industry by investigating those elements that determine quality and examining howthese influence the stability and duration of such. A conceptual model is developed to

represent this.

Chapter 4Building Producer Loyalty in Malaysias Fresh Milk Supply Chain

A conceptual model of producer trust and its influence on producer loyalty is presented.

This chapter discusses the importance of understanding producers wants, needs and

preferences. It further elaborates producer loyalty as the mirror reflection of customer

loyalty.

Chapter 5 Linking Price Satisfaction and Business Performance in Malaysias Dairy

Industry

Chapter 5 presents the dimensions of price satisfaction and its influence on loyalty and

business performance. This chapter elaborates the dimensions of price satisfaction, namely

price-quality ratio, price fairness, price reliability, price transparency and relative price.


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Chapter 6 Producer Segmentation and Long-Term Relationships in Malaysias Fresh

Milk Supply Chain

In this chapter, the author argues that producers are actually not homogenous but rather

heterogeneous. Therefore, by using cluster analysis, two well defined groups are identified,

each differing in their perception of relationships with their buyers, as well as their

demographic characteristics.

Chapter 7Factors Influencing Malaysian Consumers Consumption of Dairy Products

Given the background of Malaysias dairy industry, and in order to fully understand how a

domestic industry can most efficiently meet consumer demand, this chapter investigates

what factors influence consumer consumption and their preference for dairy products. This

chapter provides essential information on consumer behaviour and its significance for thedevelopment of Malaysias dairy industry.

Chapter 8Discussion and Implications

In this chapter, the findings of the study are discussed and the managerial implications are

explored along with suggestions for further research and a discussion of the research

limitations of this study.


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CHAPTER 2: Relationship marketing and the agri-food supply chain

This chapter is an overview of the literature dealing with relationship marketing (RM) and

first presents a discussion of the theoretical approaches to relationship marketing followed

by its history and development. In addition this chapter looks at relationship marketing

from the perspective of the buyer and seller relationship in agricultural industry and its

significance to Malaysias dairy industry. The chapter concludes with a discussion of some

methodological approaches which have been used in relationship marketing.

2.1 Introduction

The structure of food supply chains has been driven by the unprecedented development of

modern transportation, advanced technology and communications, as well as changing and

increased food demands (Fischer & Hartman, 2010). These changes create competition and

promote collaboration among actors in the supply chain.

Trienekens et al. (2003) state that there are four dimensions in food supply chain analysis:

(1) the business economics dimension which relates to efficiency (in-cost benefit

perspective) and to consumer orientation; (2) the environmental dimension, which

concerns the way production, trade and distribution of food are embedded in the ecological

(environmental) outcome; (3) the technological dimension, which is about the waytechnology (product and process technology, information and communication technology)

can be applied to improve production and distribution of quality and safe food products;

and (4) the social and legal dimension, which relates to relational norms and issues like

human wellbeing, animal welfare and sustainable socio-economic development.

The main focus of this study is the socio-economic dimension of the supply chain,

specifically how relationships influence buyers and sellers in Malaysias dairy industry.Webster (1992) indicates that there has been a shift from a transaction to a relationship

focus and stresses that, the focus shifts from products and firms as units of analysis to

people, organizations, and the social processes that bind actors together in ongoing

relationships (Webster, 1992, p.10). The role of relationships is important for highly

perishable commodities like milk. Other studies suggest wide-ranging outcomes and

benefits from relationship marketing (RM), including lower transaction costs, enhanced

efficiencies, joint decision-making, better information sharing and joint investments (Batt,


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2003; Lu et al., 2008). Therefore, it is essential to understand the buyer-seller relationship

especially in the agricultural setting.

2.2 Theoretical Approaches to the Buyer-Seller Relationship

There are several theoretical approaches that clearly relate to the development of buyer and

seller relationships. Some may contribute directly to understanding the relationships, and

some may be seen in isolation but are still significant. In this section, four interrelated

theories are discussed: (i) transaction cost approach; (ii) principal-agency theory; (iii)

resource dependence theory; and (iv) resource advantage theory.

2.2.1 Transaction cost approach

In the traditional microeconomic paradigm, the firm is involved in the market transactionin order to secure resources such as labor capital, raw materials and provision inputs. Each

transaction is essentially dependent on all other transactions, guided solely by the price

mechanism of the free, competitive market as the firm seeks to buy at the lowest available

price. Williamson (1985) believes that markets may be considered to operate inefficiently

in certain instances, due to human and environmental factors. When the market is

characterized by complexity and uncertainty, then the bounded rationality of man makes it

very costly to design and negotiate viable contracts.

According to Webster (1992), normally the transaction occurs in a one-time exchange of

value between two parties with no prior or subsequent interaction which he calls a pure

transaction. In the pure transaction, there is no brand name, no recognition of the

customer by the seller, no credit extension, no preference (Webster, 1992). In other

words, it is a traditional view of the transaction cost. In the context of developing and

building relationships there are other costs associated with the transaction itself such as the

costs of searching, of negotiating and contracting, and of monitoring supplier performance.

These costs arise for ex ante reasons (drafting, negotiating, and safeguarding agreements

between the parties to a transaction) and ex post reasons (maladaptation, haggling,

establishment, operational, and bonding costs (Williamson, 1985). Williamson (1985) also

argues that there are two human and three environmental factors that lead to transaction

costs arising.


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The two human factors are:

1. Bounded rationality: Humans are unlikely to have the abilities or resources to consider

every state-contingent outcome associated with any transaction that might arise.

2. Opportunism: Humans will act to further their own self-interests.

The three environmental factors are:

1. Uncertainty: This exacerbates the problems that arise because of bounded rationality and

opportunism.

2. Small numbers trading: If only a small number of players exist in a market place, a party

to a transaction may have difficulty disciplining the other parties in the transaction via the

possibility of withdrawal and use of alternative players in the market place.

3. Asset specificity: The value of an asset may be attached to a particular transaction that itsupports. The party who has invested in the asset will incur a loss if the party that has not

invested withdraws from the transaction. The possibility (threat) of this party acting

opportunistically leads to the so-called hold-up problem.

Within the buyer-seller relationship, frequent purchase of raw materials such as

agricultural input and products goes beyond the norm of pure transaction. Repeated

purchases encourage constant interaction and communication between exchange partners.Over time, both parties start to develop trust and promote loyalty which is the foundation

of a relationship and the buyers should find it easy to interact and buy from the same

suppliers, thus minimizing the effort needed to obtain and process information from

different suppliers. Therefore, this reduces the cost of searching and negotiation. In other

words, relationships make transactions more cost efficient (Webster, 1992).

Thus in the agricultural industry, one of the many ways to reduce transaction costs is

through vertical integration whereby the buyer and the supplier (seller) engage in a mutual

collaboration through contractual activities. Williamson (1985) argues that in order to

minimize costs and obtain economic efficiency, firms should practise the strategy of

vertical integration. However, in being integrated with other firms, moral hazards such as

lack of trust and self-interest may occur. Williamson further explains in a later article that

transaction cost economics aspires to describe man as he is in cognitive and self-

interestedness respects (Williamson, 1991, p.79).


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2.2.2 Principal-agency theory

The next theoretical approach to the area of buyer-seller relationships is the principal-

agency theory which makes two assumptions: (1) that goal conflicts exist between the

principals and agents; and (2) that agents have more information than their principals

(Waterman, & Meier, 1998; Grossman, & Hart, 1986). According to the principal-agent

paradigm, the principal recognizes the adaptive nature of the agents decision-making

process, and will take advantage of this knowledge by choosing contractual terms which

will provide an incentive for the agent to choose an input, from the set of feasible inputs,

so as to maximize the agents expected utility while simultaneously providing the highest

possible expected utility for the principal (Mirman, 1974: 238). Transaction costs and

information asymmetry are central to principal-agency theory which initially searches for

the best option, that both partners be interdependent thus minimizing the sum of the costsinvolved (Hobbs, 2001). However, interdependence between firms may cause other

problems such as power asymmetry. This links us to the next theory.

2.2.3 Resource dependence theory

Resource dependence theory views inter-firm governance as an ideal strategy to respond to

the conditions of uncertainty and dependence (Pfeffer & Salancik, 1978). The premise of

this theory is that firms will seek to reduce uncertainty and manage dependence by meansof establishing formal or semiformal links with other firms (Heide, 1994). This however,

may create power asymmetry when the exchange partner is much more powerful than the

other. In a contractual relationship, the contractor usually is the one who has more power

while the contractee is the one who has to depend on the contractor (Singh, 2002). Thus,

some scholars argue that related norms such as trust may help to create a more balanced

arrangement with regards to power (Heide & John, 1992).

2.2.4 Resource advantage theory

Resource advantage theory derives from heterogeneous demand theory and resource based

theory of the firm (Hunt & Lambe, 2000). According to this theory, competition is a

process for any firms to secure a position in a market place. The way to achieve this is by

acquiring competitive advantage. Hunt et al. (2006, p.76) further explain that once a

firms comparative advantage in resources enables it to achieve superior performance

through a position of competitive advantages in some market segment(s), competitors

attempt to neutralize and/or leapfrog the advantage of the firm through acquisition,


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imitation, substitution, or major innovation. Therefore, firms enter into relational

exchanges when such relationships contribute to the competitiveness of firms (Hunt et al.,

2006; Hunt, & Lambe, 2000).

In many cases, scholars have proposed other theories which contribute to and motivate

research on the buyer-seller relationship. The theories presented here are only some of the

many theories which have evolved in the marketing literature and which are considered to

be the most relevant for this dissertation.

2.3 Relationship Marketing Evolution

The development of marketing research over the years has been dynamic and varied.

Kotler (1972, p. 46) stated that marketing emerged each time with a refreshed andexpanded self-concept. After 39 years, the statement remains significant. In recent years,

marketing has evolved from marketing mix to relationship marketing (Grnroos, 1994).

The concept of relationship marketing was first introduced by Berry in 1983 (Grnroos,

1994; Berry, 1995), and since then the concept has been used widely and consistently in

the marketing literature. Scholars in various industries have continued to conduct research

to understand the nature and consequences of relationship marketing in their respectiveindustries. Important research questions such as the what, who, how, when, and why in

relation to this concept are an interesting field to explore.

2.3.1 What is relationship marketing (RM)?

Due to its popularity over the past 10 years, many scholars have attempted to define

relationship marketing based on their research interest and on what has been happening in

the industry. For instance, Berry (1983, p.25) defined relationship marketing as attracting,

maintaining, and in multi-service organizations - enhancing customer relationships.

Jackson (1985, p.2) refers to RM as marketing oriented toward strong, lasting

relationships with individual accounts. Berry and Parasuraman (1991) propose that RM

concerns attracting, developing, and retaining customer relationships. These definitions are

primarily focused on seller relationships with their buyers (customers), which cover only

half of the supply chain relationships.


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Another perspective of RM was introduced by Morgan and Hunt (1994), which embraces

all the supply chain actors such as suppliers, buyers and sellers in industrial marketing.

They state that RM refers to all marketing activities directed at establishing, developing,

and maintaining successful relational exchanges (Morgan, & Hunt, 1994, p. 22). Th is

definition is supported by Sheth and Parvatiyar (1995), who view relationship marketing as

attempts to involve and integrate customers, suppliers, and other infrastructural partners

into a firms developmental and marketing strategies. Although most definitions have

similar denominators, they actually cover different scopes.

However, there is one definition which can be regarded as a comprehensive definition and

is discussed in detail by Grnroos (1996). Grnroos (1991, p.8) defines RM as follows:

Relationship marketing is to establish, maintain, and enhance relationships withcustomers and other partners, at a profit, so that the objectives of the parties involved are

met. This is achieved by a mutual exchange and fulfilment of promises . In this definition,

Grnroos emphasizes the mutual benefits and keeping of promises between exchange

partners. Thus, RM can be used as a strategy in which the management of interactions,

relationships and networks is the fundamental issue (Gummesson, 1994). The main goal of

RM is to create and maintain lasting relationships between exchange partners that provide

mutual benefits to both sides (Rapp, & Collins, 1991). It is, therefore, essential tounderstand who are the main actors involved in these relationships.

2.3.2 Who are the main actors and how do they interact?

Based on Grnroos (1991) definition, RM covers all forms of relational exchanges and

does not limit itself to one way communication but uses two way communication (Dwyer,

Schurr, & Oh, 1987). As shown in Figure 2.1, the interaction of many actors in the supply

chain is covered in the relationship marketing terminology. The interactions between actors

are dynamic and interchangeable. The seller may be a buyer at the same time in a

reciprocal setting (Grnroos, 1994). For instance, in the dairy industry, a milk buyer

purchases milk from dairy producers, and in other exchanges, a milk buyer, such as an

agent or processor sells it to the distributor. The distributor then changes their role from

milk buyer to become a milk seller to the customer. The interchanging roles in the supply

chain are determined by the nature of the transaction.


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In relationship marketing, the interaction between buyer and seller has been widely

investigated by scholars. It can be distinguished by looking at two main relationships:

business-to-customer (B2C) relationships; and business-to-business relationships (B2B).

The B2C relationship looks at the interaction between customers and firms, while the B2B

relationship looks at the interaction between firms. Both are present in one supply chain

but with different perspectives and objectives.

The B2C interaction mainly focuses on understanding customer behaviour and

characteristics such as how to attract loyal customers by capturing customerssatisfaction

and trust (Diller, 2000), while the B2B relationship looks at how to build successful and

workable partnerships such as achieving mutual benefits and joint actions (Morgan, &

Hunt, 1994; Spekman, 1988).

Figure 2.1: Supply chain relationship

Therefore, in any supply chain, it is essential to acknowledge the actors and their roles in

the transactions and relationships. The actors in the supply chain may vary based on the

industry. For the agriculture industry, it may start with the farmer/producers or with the

processors (as contractors who provide provisional input to farmers) and end up with

consumers (Eaton & Sherpherd, 2001). The number of players in the supply chain also

depends on the complexity and length of the chain. It has also been noted that supply chain

management in developed and developing countries can be distinguished and variesaccordingly. This also applies in the case of relationship marketing. Palmer (1997)

indicates that relationship marketing means different things in different cultures. This

raises another question, when and how does RM evolve?

2.3.3 When and how does relationship marketing evolve?

Relationship marketing is a new-old concept (Berry, 1995). It was practised centuries ago;

Grnroos (1994, p.18) cites the Middle Eastern proverb: As a merchant, youd better have

friends in every town. It was part of many cultures and traditions to form good

Agent

Producer

Processor

RetailerCustomer


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relationships with each other. In those times, most farmers sold their produce directly in

traditional markets and had a face-to-face encounter with their customers. Sheth and

Parvatiyar (1995) argue that a relationship orientation in marketing was evident during the

pre-industrial era. Direct interaction between producers and consumers inevitably

promoted cooperation, reliance, and trust among marketing actors.

However, as populations grew and modernization took place through industrial eras, the

face-to face encounter with customers changed to multiple interactions. The supply chain

became much more dynamic and complex and involved many players such as producers,

traders, manufacturers, retailers and customers. An immense number of transactions

occurred and many firms suffered during the industrial eras due to practices of competitive

bidding (Sheth & Parvatiyar, 1995).

Sheth and Parvatiyar (1995) explain that many firms were not keen on discrete transactions

and began to develop longer-term contracts between exchange partners. Some engaged in

long-term partnerships and formed alliances with other companies. For example, a

partnering type of relationship between Whirlpool and Sears, and between McDonalds and

Coca-Cola has existed for more than 50 years.

Similarly, Mitsubishi Electric and Westinghouse Electric have been engaged in an alliance-

type relationship for over 60 years, as are Philips and Matsushita (Business International

Corporation, 1987). These developments were the preamble to the growth of a relationship

orientation to marketing, in particular in the post-industrial era, in the rebirth of direct

marketing between producers and consumers (Sheth & Parvatiyar, 1995). Another view of

how relationship marketing evolved is the changing perspective of marketing strategies

from transactions to relationships. Table 2.1 shows a comparison between transaction

marketing and relationship marketing strategies.

Based on Table 2.1, marketers and practitioners can see obvious differences and

advantages. For every type of product and service a variety of strategic approaches can be

used. Gummesson (1994, p.16) explains that not all relationships are important to all

companies all of the timesome marketing is best handled as transaction marketing.


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Table 2.1: Marketing strategies of transaction and relationship marketing

The strategy continuum Transaction Marketing Relationship Marketing

Time perspective Short-term focus Long-term focus

Dominating marketing function Marketing mix Interactive marketing (supported by

marketing mix activities)

Price elasticity Customers tend to be sensitive to price Customers tend to be less sensitive to

price

Dominating quality dimension Quality of output (technical quality

dimension) is dominating

Quality interactions (functional

quality dimension) grows in

importance and may become

dominating

Measurement of customer

satisfaction

Monitoring market share (indirect

approach)

Managing the customer base (direct

approach)

Customer information system Ad-hoc customer information survey Real-time customer feedback system

Interdependency between

marketing, operations and

personnel

Interface of no or limited strategic

importance

Interface of substantial strategic

importance

The role of internal marketing Internal marketing of no or limited

importance to success

Internal marketing of substantial

strategic importance to success

The product continuum Consumer packaged consumer Industrial services

Goods durable Goods

(Source: Grnroos, 1994)

Grnroos (1994, p.10) further elaborates that the best strategy may depend on what types

of customer the firm is serving and on where in its life cycle the business is. For example,

even in a service industry a newly established business would probably benefit most from a

transaction-type strategy, because it needs to get a sufficient number of exchanges or

transactions in order to create the cash flow required to survive. However, as this

hypothetical service firm becomes more established, it would probably be better to turn to

a relationship-type strategy. Notably, in the presence of competitors and escalating

demand, the relationship marketing strategy has become essential and applicable in the

supply chain.

2.3.4 Why is relationship marketing so prominent recently?

Relationship marketing has been widely used and investigated by practitioners and

scholars, from both B2C and B2B perspectives. A whole range of research from various


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industries can be seen in the marketing literature, such as the banking industry (Matzler,

Wurtele, & Renzl, 2006; Ndubisi, 2007a), manufacturing industry (Petison, & Johri, 2008),

and agricultural industry (Batt, 2003a; Boniface et al., 2010; Gyau, & Spiller, 2008).

Grnroos (1999) emphasizes that globalization of trade, maturing markets, increased

customer knowledge, growing buyer sophistication, increased domestic and global

competition and technological development are some of the reasons relationship marketing

has become essential. Fischer and Hartmann (2010) further stress that increasing consumer

demand and food safety and quality standard requirements in the agri-food industry also

induce a high intensity of relationship marketing.

Figure 2.2 Factors influencing relationship marketing success

Source: Adapted from Hunt et al., (2006)

Hunt et al. (2006) explain that the success of relationship marketing is influenced by

factors such as resource factors, competence factors, internal marketing factors, relational

factors, public policy factors, historical factors, market offering factors and information

technology factors (see Figure 2.2). Hunt et al. (2006) drew most of these factors from

various literature streams such as strategic management literature, relationship marketing

Resource Factors

Complementary Idiosyncratic

Relationship

Marketing

success

Competence Factors

Alliance competences Market-relating capabilities Relationship portfolio

management

Internal Marketing Factors

Internal market orientation Part-time marketers

Relational Factors

Trust Commitment Cooperation Keeping promises Shared values communication

Information Technology Factors

Inter-organizationalinformation systems

Integrated infrastructure CRM Database Data mining

Public Policy Factors

Property rights Contract law Alternative governance

mechanisms

Historical Factors

Opportunistic behavior Termination costs Relationship benefits

Market Offering Factors

Quality Innovativeness Customization Brand Equity


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literature and information technology literature. Yet the factors are significant and

contribute to relationship marketing success in many ways.

Over the years, in the relationship marketing stream of literature, many scholars have

identified the benefits gained through practising and applying relationship marketing, such

as: (1) strengthening competitive advantages in the market place (Hunt, Arnett, &

Madhavaram, 2006); (2) achieving financial and non-financial performance (Gyau, &

Spiller, 2008; O'Toole, & Donaldson, 2000); (3) capturing customer/supplier loyalty

(Boniface et al., 2010; Rauyruen, & Miller, 2007); (4) increasing partners commitment

and satisfaction (Caceres, & Paparoidamis, 2005; Cambra-Fierro, & Polo-Redondo, 2008);

and reducing transaction costs (Gow, Streeterc, & Swimend, 2000; Hunt, & Lambe, 2000).

These benefits have consistently attracted more scholars and practitioners to therelationship marketing research, including the agriculture and agricultural food industry.

In the next section, a more narrowly focussed perspective of relationship marketing in the

buyer-seller relationship is presented. The discussion is mainly focused on relationship

marketing research in the agri-food industry and its importance to the respective actors in

agri-food supply chains.

2.4 Emphasis on buyer-seller relationships in agriculture

The purpose of relationship marketing is to enhance marketing productivity by achieving

efficiency and effectiveness (Gronroos, 1991). This is a crucial and essential role for

supply chain management especially in the agri-food industry. Several factors have led to a

much more coordinated and integrated supply chain such as: (1) increasing food demand;

(2) rising consumer health awareness; (3) foreign direct investment (FDI); (4) market

concentration; (5) information and communication technologies; and (6) human resource

skills development in agriculture.

The issue of increasing food demand is highly related to urbanization, population growth

and income growth, in developing countries in particular (Warr et al., 2008). These

changes inevitably impel agribusiness firms and food suppliers, as well as food producers,

to be coordinated and integrated in their supply chain management. As for the increasing

health awareness factor, issues such as food labelling, food traceability and food quality

have become critical to food processors as well as food producers (Grunert, TinoBech-


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Larsen, & Bredahl, 2000; Prescott, Young, O'Neill, Yau, & Stevens, 2002). Coping with

consumers wants, preferences and needs has changed the structure of the agri -food supply

chain. Production, processing, and distribution systems have been adapting to reflect

consumer demands. The food retail industry, including hypermarkets and major centres, is

moving rapidly in time with the changes in the emerging economy.

The new structure demands fast and efficient delivery, graded, consistent and high quality

produce and consumer-centred marketing strategies. A traditional marketing system that

concentrates on building respondents production capabilities is no longer sufficient to

ensure sustainable income and productivity growth (Man, & M. Nawi, 2010). Therefore,

production activities must be linked to market demand and must be examined within the

context of the whole supply chain. One of the many types of market linkage arrangementsis contract farming (CF).

Contract farming can be defined as an agreement between farmers and processing and/or

marketing firms for the production and supply of agricultural products under forward

agreements, frequently at predetermined prices (Eaton, & Shepherd, 2001). Small-scale

producers establish the production arrangement with agribusiness firms. These

arrangements are made carefully and precisely to achieve high quality agriculturalproduction. Through this scheme, small producers are able to gain economic benefits and

at the same time stimulate rural development in the respective area (Baumann, 2000;

Eaton, & Shepherd, 2001; Bijman, 2008).

Mighell and Jones (1963) distinguish three types of contract: a market-specification (or

marketing) contract; a production-management contract; and a resource-providing contract.

These contracts differ in their main objective, control and function. The level of control

and ownership in each type of contract is varied and diversified in most developing

countries (Glover, Lim et al. 1992; Rehber 2008).

A market-specification contract is also known as a marketing contract. The processor and

producers make a pre-harvest agreement on the sale of certain crops or livestock. The

contractor reduces producers uncertainty by buying their production in advance. In this

contract, producers are obliged to fulfil certain conditions such product quality, size,

amount supplies, and other special requirements. The contractor has the right to reject any


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products which are not up to the standard specified in the contract. Even though producers

have full control and ownership of their own production, they also have to take on the risk

of their production activities.

The production-management contract, however, is a more specific and comprehensive type

of contract. In this contract, the production process is monitored and controlled by the

contractor. The producers need to follow the production process and method as specified in

the contract, and the contractoris the only buyer of the production at a pre-determined

price. Generally, the level of production control and producers ownership is inevitably

shifted to the processor. The producers, however, through this contract transfer their

market risk to the contractor.

Another type of contract is the resource-providing contract. It is an extension of the

production-management contract. This contract not only provides market access but also

key inputs for the agricultural production. The processor provides input provision such as

seed and fertilizer. They also introduce new technology, skills and production management

processes. Producers mostly prepare the land and labor for the production. Although most

of the production activities are controlled and monitored tightly by the contractor,

producers still share a substantial part of the risk in making production decisions. The threetypes of contract address and reduce transaction cost accordingly (see Bijman, 2008).

Another traditional type of contract is the informal contract which is a verbal arrangement

between the processors and producers. Bijman (2008:6) states that Although contract

farming is becoming more important in developing countries, this does not necessarily lead

to more formal contracts. Informal contracts are generally more efficient . He stresses that

informal contracts may be less costly and in a simple, informal contract, a self-enforcement

contract is needed. Self-enforcement contracts refer to producersown initiative to honour

the contract. Bijman (2008) notes that a producers reputation plays an important role in

self-enforcing agricultural contracts. Producers and processors in this informal contract

automatically renew their (verbal) agreements unless one party makes an early

commitment not to renew or comply with the contractual arrangements.

Thus, the emergence of contract farming activities has become one of the reasons for the

rise in multinational companies investment in developing countries (Glover, 1984).


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Although the benefits of this arrangement to farmers, such as market access and constant

income, are practically guaranteed, the negative consequences of contract farming should

not be taken lightly. Through various types of contract farming models, foreign companies

such as Dutch Lady, Nestle and Dairy Farm Holdings Limited establish their footing in

developing countries and bring their professional workers, introduce new technologies and

also new cultures into local organization. New culture means adaptation to new standards

of beliefs and practices while new technology means bargaining power to the foreign

company (Glover, & Lim, 1992; Guo, 2008; Rehber 2008). Therefore, the changing

patterns of consumption and emergence of FDI, especially in developing countries, are

making the buyer and seller interaction in the food supply chain extremely important.

Kirsten (2002) raises some issues in contract farming that relate to relationship problemssuch as power asymmetries, and emphasizes that trust and other relational variables are

essential for buyer-seller relationships in agriculture. The power asymmetries have been

regularly discussed in the contract farming literature (Wilson, 1986; Kirsten, 2002; Singh,

2002) where most argue that the processor gains considerable power from contracting,

particularly from the production arrangements. In the production-management contracts,

the degree of the producers ownership and production control is shifted towards the

processor.

Other research indicates that high power relations create souring contractual relationships

(Batt, 2003; Gyau, & Spiller, 2007a) and significantly reduce producers trust in the

processor. Singh (2002, p.1635) states clearly that though contracting has led to higher

incomes for the farmers and more employment for labor, it is not smooth sailing for firms

and is unlikely to be sustained due to lack of trust between firms and farmers.

Therefore, relationship marketing in the agricultural industry, particularly from the buyer

and seller perspective, has been given much attention, ranging from building trust to

improving relationship quality, capturing loyalty and increasing commitment between

exchange partners (Boniface et al., 2010; Batt, 2003; Ghosh, & Fedorowicz, 2008; Gyau,

& Spiller, 2007a; Lu, Feng, Trienekens, & Omta, 2008; Reynolds, Fischer, & Hartmann,

2009).


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Fischer and Hartmann (2010) further elaborate that the development of market

concentration, information and communication technologies and human resources in

agriculture requires closer and more sustainable relationships. They argue that hypermarket

and supermarket growth in developing countries changes the traditional structure of the

supply chain, from many food retailers to one or two concentrated food markets.

Confronted with increasing market power from hypermarket players, most agricultural

producers and processors are forced to engage with these big players. Thus, those with

good relationships may stay longer in the food market and vice versa.

In the emerging economy, workers skills and willingness to change have been crucial

issues in any organization. Having quality and skilful workers continues to enhance and

improve firms competitive advantage. Yet, in the presence of positive relationshipsbetween firms, a shortage of skilled workers can be overcome and close relationships

between firms encourage learning organization as well as sustainable business

relationships through mutual understanding and skills exchanges.

2.4.1 Stages of buyer-seller relationship development

Building relationships is a complex and dynamic process. In fact, they are not built

overnight but through a series of steps and interactions. From the buyer and sellerperspective, Ford (1980) introduces five stages of relationship development: (1) the pre-

relationship stage; (2) the early stage; (3) the development stage; (4) the long-term stage;

and (5) the final stage (see Table 2.2).

As shown in Table 2.2, the development of buyer/seller relationships starts with the pre-

relationship stage wherein the buyer is looking for a potential supplier and the

characteristics of the supplier are being scrutinised in detail. Ford (1980, p.343) explains

that the distance between firms can be categorized into several aspects:

Social distance, being the extent to which both the individuals and organizations in a

relationship are unfamiliar with each others ways of working;

Culture distance, being the degree to which the norms, values or working methods

between two companies differ because of their separate national characteristics;


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Technological distance, being the differences between the two companies product and

process technologies;

Time distance, being the time which must elapse between establishing contact or placing

an order and the actual transfer of the product or service involved;

Geographical distance, being the physical distance between the two companies

locations.

Table 2.2: Development of buyer/seller relationships

1

The Pre-Relationship stage

2

The Early Stage

3

The Development Stage

4

The Long-Term Stage

5

The Final Stage

Evaluation of new

potential supplier

Evaluation initiated by:

-particular episode in

existing relationship

-general evaluation of

existing supplier

performance

-efforts of non-supplier

-other information sources

-overall policy decision

Evaluation conditioned

by:-experience with

previous supplier

-uncertainty about

potential relationship

-distance from potential

supplier

Commitment:

Zero

Negotiation of sample

delivery

Contract signed of

delivery build-up scale

deliveries

After several major

purchases or large

In long established

stable market

Experience:

Low Increased High

Uncertainty:

High Reduced Minimum

development of

institutional

Extensive

institutionalization

Distance:

High Reduced Minimum

Commitment:

Actual-Low

Perceived: Low

Actual-Increased

Perceived- Demonstrated

by informal adaptation

Actual-Maximum

Perceived-Reduced

Business based on

industry codes of

practice

Adaptation:

High investment of

management time. Few

cost savings

Increasing formal and

informal adaptation.

Cost saving increase

Extensive adaptation.

Cost saving reduced

by institutionalisation

Source: Adapted from Ford, 1980


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The second stage (the early stage) is where the buyer starts to develop a relationship. Once

the buyer is convinced that the supplier meets his requirements, then certain factors such as

experience, uncertainty, distance, between firms, commitment and adaptation will be

evaluated. In the next stages (from the development stage to the final stage), both firms

start to develop a close relationship, high collaboration and business adaptation. Ford

(1980) further argues that while a developing relationship can be achieved in stages,

sustaining a long-term relationship between exchange partners will be a great challenge.

In the agri-food supply chain perspective, Lu, Batt and Fischer (2010) propose a much

more practical model of relationship management (see Figure 2.3) and conceptualize it

based on agricultural production processes. They argue that just as crop production goes

through the process of planting, growing and then harvesting, so also does a businessrelationship (see Figure 2.3).

Figure 2.3: The agri-food chain relationship

Source: Adapted from Lu et al., 2010

The preliminary step of a relationship is the business planting process during which three

main things occur: (1) selection of the partner; (2) alignment of business goals and

procedures; and (3) allocation of resources (time, money, etc.). The second step is the

growing process when both parties will start to communicate effectively, collaborate

intensively, resolve problems jointly and nurture trust. Thirdly, exchange partners start to

harvest, and (1) share rewards/ benefits fairly and (2) evaluate, and learn from outcomes

(Lu et al.,2010).

Plant

Harvest

Grow

Agri-Food Chain

Relationship


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Therefore, as most players in agricultural settings, such as farmers, traders, producers and

processors, have known each other and interacted for a certain period of time, it is

important to understand the nature of long-term relationships, as well as the details of

certain essential relational variables such as trust, commitment and loyalty. Some research

related to the understanding of buyer-seller relationships is discussed in the next section.

2.4.2 Relational variablesinfluence on buyer-seller relationships

Scholars have identified and investigated various factors that promote long-term

relationships between exchange partners. The research has significantly improved the

understanding of agri-food supply chains, as some supply chains are long and complicated

while others are short but dynamic.

Understanding and building trust in the buyer-seller relationship has been given much

attention and has sparked significant outcomes as well as managerial implications for the

agriculture industry. Batt (2003), in his research of the fresh fruit and vegetables (FFV)

industry, found that certain factors such as satisfaction with the exchange transaction and

sharing of similar goals improve growers trust in the traders, while use of power by the

traders and information asymmetry reduce growers trust.

Gyau and Spiller (2007), in investigating the relationships between FFV exporters and

importers, found other factors such as price satisfaction, non-economic satisfaction and

goal attainment increased trust, while factors that reduced trust related to use of power and

cultural dissimilarity. Another interesting study about trust was completed by Lu et al.

(2008). They found that both seller and buyer trust in exchange partners was highly

influenced by Guanxi networks,which relate to personal connections or relationships on

which an individual can secure resources or draw benefits as well as in social life (Lu et

al., 2008, p.254).

Other relational variables which have been highlighted in buyer-seller relationships are

commitment, satisfaction and loyalty. In many ways, scholars have constructed the

variables through different settings and influences. Some scholars identified the

significance of commitment by looking at the influences of satisfaction and trust (Kwon, &

Suh, 2004), while others used only trust and commitment as mediating constructs in buyer-


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seller relationships (Morgan, & Hunt, 1994). Another study investigated the influence of

satisfaction on trust (Ganesan, 1994).

A recent study uses all three relational variables, namely trust, satisfaction and

commitment, to develop relationship quality and measure its influence on loyalty

(Rauyruen, & Miller, 2007), while others use only satisfaction and commitment to measure

relationship quality (Gyau, & Spiller, 2010). The list goes on with numbers of scholars

investigating the determinants of and influences on relationship quality (Naude, & Buttle,

2000; Ndubisi, 2007b). Overall, relational variables have been used consistently and

significantly in understanding the building and strengthening of buyer-seller relationships.

2.5 Methodological approaches and data analysis

In Chapter1, a conceptual model was developed to provide a comprehensive understanding

of the whole thesis. The author used difference methodology such as Structural Equation

Modeling (SEM), Cluster Analysis and Logit Regression for data analysis.

2.5.1 Structural Equation Modeling

Structural Equation modelling (SEM) can be used to test (and consequently to either

support or reject) theoretical assumptions with empirical data. It is therefore essential tohave a sound understanding of the structure of theories to understand the different

components of structural equation modeling.

According to Baggozzi and Phillips (1982), a theory may consist of three different types of

concepts: (a) theoretical concepts, which are abstract, unobservable properties or

attributes of social unit of entity (p.465); (b) empirical concepts, which refer to

properties or relations whose presence or absence in a given case can be inter-subjectively

ascertained, under suitable circumstances, by direct observations (Bagozzi & Phillips,

1982, p.465); and (c) derived concepts, which are unobservable (like theoretical concepts)

but unlike theoretical conceptsmust be tied directly to empirical concepts (Bagozzi &

Phillips, 1982, p.465). Therefore, it is possible to construct a research model that represents

a certain theory, simply by converting theoretical and derived concepts into unobservable

(latent) variables, and empirical concepts into indicators, which are linked by a set of

hypotheses (representing either non-observational hypotheses, the theoretical definitions,

or correspondence rules) (Haenlein & Kaplan, 2004).


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In this investigation, two types of SEM were used in testing three different models namely,

AMOS 17 using SPSS software and (Partial Least Square) PLS using the SmartPLS

software 2.0. Both methods are widely used in the marketing literature but vary in terms of

application and assumptions. A covariance based method such as AMOS and LISREL was

developed by Jreskog in 1970 while PLS which is known as variance-based SEM was

developed by Wold (Jreskog & Wold, 1982).

Tenenhaus et al, (2005) refer to Jreskogs SEM model as hard modeling (heavy

distribution assumptions, several hundreds of cases necessary) and PLS as soft

modelling (very few distribution assumptions of cases necessary). According to Haenlein

and Kaplan (2004), PLS is best used for a small sample size. Covariance-based SEM such

as AMOS is best used for sample size which exceeds 100 observations regardless of otherdata characteristics to avoid problematic solutions and obtain acceptable fit concurrently

(Nasser & Wisenbaker, 2003, p.754). Other researchers even recommend a minimum

sample size of 200 cases (Marsh et al., 1998). In this research the author applied AMOS in

one model (Chapter 4) and used PLS for the other two models (Chapter 3 and Chapter 5).

2.5.2 Cluster Analysis

Apart from SEM, this thesis also used cluster analysis using relational variables (such astrust and satisfaction) and price satisfaction dimensions segmentation in Chapter 6.

According to Punj and Stewart (1983) cluster analysis provides one, empirically based,

means for explicitly classifying objects. Such a tool is particularly relevant for the

emerging discipline of marketing which is still wrestling with the problems of how best to

classify consumers, products, media types, and usage occasions (Punj & Stewart, 1983,

p.135).

Punj and Stewart (1983) further elaborate that the use of cluster analysis in marketing is:

(a) to identify all segmentation (people, markets, organizations) that share certain

common characteristics (attitudes, purchase propensities, media habits, etc.) (p.135); (b)

to seek better understanding of buyer behaviours; (c) for the development of potential new

product opportunities through brands/ products segmentation; (d) an alternative to factor

analysis and discriminant analysis. Finally they state cluster analysis has been used as a

general data reduction technique to develop aggregates of data which are more general and


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more easily managed than individual observations (Punj & Stewart, 1983, p.136). In this

study, cluster analysis was used to identify buyer-seller relationship segmentation.

2.5.3 Logit Regression

To gain a better understanding of the dairy industrys development and viability in

Malaysia in the near future, a consumer study was conducted and factors influencing

consumer preferences for dairy products such as fluid milk and powdered milk was

investigated.

In order to understand the probability for a consumer to increase consumption of fluid milk

or dairy products, two logit regressions were developed based on the traditional logit

regression model (Greene, 2003) :-

The logit model has been widely used in many fields, including economics, market

research, and transportation engineering (Greene, 2003). In the consumer study, factors

such as age, level of education and perceptions of fluid milk were added in the logit

equation to understand the consumers consumption probability. By looking at theestimated coefficients and marginal effects, the probability for a consumer to increase their

consumption of dairy products and fluid milk was known.

2.6 Conclusion

Consistent with the objectives of this dissertation, discussion of the development of

relationship marketing and the importance of buyer-seller relationships in the food supply

chain has been presented in this chapter. Some related theoretical approaches have been

briefly discussed, with links to the motivation for buyer-seller relationship research.

This chapter has provided a general overview of relationship marketing and its influences

from the buyer and seller perspective. For this study, the conceptual framework presented

in Chapter 1 (Figure 1.1) provides a clear understanding of how some relational variables

have been used to explain relationship quality and as a measure of long-term relationship.

Justification of the methodologies used has also been presented and a detailed explanation

of each methodology will be given in the respective chapters.


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In the next chapters, comprehensive and detailed reviews of the literature are presented

which further explain the conceptual model and motivation for each chapter.

This research presents five articles: four articles (Chapters 3 to 6) on buyer-seller

relationships in the dairy industry in Malaysia, addressing the issues of loyalty, long-term

relationship, price satisfaction dimensions and relationship segmentation; and one article

(Chapter 7) looking at consumers preferences for and consumption of dairy products, all

of which is an attempt to understand the dairy supply chain in Malaysia and its

sustainability in the near future.


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CHAPTER 3:The role of long-term relationships in Malaysias

fresh milk supply chain1

Bonaventure Boniface, Amos Gyau and Randy Stringer

Agriculture, Food and Wine Business, School of Agriculture, Food and Wine

University of Adelaide, S.A 5005, Australia

Phone: +6108-83130782 (Office) +614080934685 (Mobile)

Fax: +6108-83037109

E-mail:[email protected]

1Submitted to Supply Chain Management: An International Journal on 3rdJuly 2011.
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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Statement of Authorship

Bonaventure Boniface developed the survey que

buyer and seller relationship in the malaysia dairy industy

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